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PPS Investment Perspectives – Economic performance in Q3 2023

23 October 2023 Luigi Marinus, Portfolio Manager at PPS Investments

Inflation expectations and the effect on interest rates remained the major theme as it has been for the last few quarters.

US inflation came off its peak levels and moved sharply closer to the US Federal Reserve (Fed) target level. In the third quarter however, consensus seems to have swayed as inflation started the quarter at 4.1% (May print), went down to 3.0%, and rebounded back to 3.7% by quarter end.

This not only meant that a first rate cut became less likely, but the Fed chairman remained hawkish in his interest rate stance reiterating that the Central Bank would act on inflation expectations and that inflation concerns remained to the upside. The change in global sentiment to the direction of inflation and interest rates led to a difficult quarter for growth assets.

While the key global themes for the year, namely global inflation, interest rates, and the US recession, remain the main areas of concern the narrative on each has evolved during the quarter.

In South Africa, inflation and the direction of interest rates also remain topical, but fiscal concerns and the forthcoming Medium-term Budget Policy Statement may be more influential to markets in the short term.

The debate on the prospect of a US recession has gone from it being inevitable to a hard landing, implying to deep recession, to a soft landing with a mild recession and no recession at all. As at quarter end the consensus seems to suggest that a mild recession sometime in 2024 is the most likely outcome. The reason for the uncertainty is that firstly recessions are hard to forecast, and in addition, inflation has moved sharply in the past 18 months and unemployment has remained surprisingly low. In South Africa, the GDP growth forecast over the next few years remains disappointing at 0.7% for 2023 and 1.0% and 1.1% for 2024 and 2025 respectively. Even though the two most recent inflation prints were close to the mid-point of the target band the inflation forecast for 2023 and 2024 is 5.9% and 6.0% highlighting the reason for the Monetary Policy Committee to remain hawkish as inflation concerns remain to the upside. Towards the end of the quarter, loadshedding levels declined somewhat but the additional costs to businesses to keep generators fuelled remain a headwind and it remains uncertain when higher levels may return.

A looking ahead
Post the end of the quarter, the US inflation print of 3.7% was slightly higher than the consensus expectation of 3.6%. Even though this was only a small difference it shows the risk to the upside and the reduced likelihood of a first-rate cut.

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